Prosecutors Reach Agreement With 4 in Squawk Box Case, U.S. Says

Four of six defendants accused of
illegally tipping day traders to confidential data on internal
“squawk boxes” have agreements with the U.S., federal
prosecutors said.

“By the end of the this week, I expect that four of the
six defendants will have resolved their respective cases with
the government,” Assistant U.S. Attorney James McMahon in
Brooklyn, New York, said in a letter to U.S. District Judge John Gleeson, who is presiding over the case.

“We have reached an agreement in principle with another
defendant, which would also resolve that defendant’s related
case with the Securities and Exchange Commission,” McMahon said
in the Feb. 4 letter.

The prosecutor didn’t specify in the Feb. 4 filing which
defendants are reaching the agreements or the terms of the
deals.

McMahon said that he expects the government will reach a
resolution with a fifth unidentified defendant in the criminal
case and a related U.S. Securities and Exchange Commission case.
A lawyer for one defendant, Robert Malin, the former president
of A.B. Watley Group Inc., said his client was the only one who
hasn’t reached an agreement with the U.S.

‘Similar’ Resolution

“Mr. Malin hopes to reach a resolution similar to those
which the government seems to have reached with his co-
defendants” Roland Riopelle, Malin’s lawyer, said yesterday in
a phone interview.

Gleeson scheduled the next hearing in the case for March
28.

The U.S. Court of Appeals in New York reversed the
convictions of all six men after ruling that prosecutors in
withheld evidence and failed to disclose until after the trial
30 deposition transcripts taken by the U.S. Securities and
Exchange Commission. The appeals court said that some of the
evidence would have supported the defense of ex-Merrill Lynch
broker Kenneth Mahaffy Jr. and his co-defendants.

In November, prosecutors told Gleeson at a status
conference in the case that they were considering the
possibility of retrying the defendants.

Day Trading

In addition to Mahaffy Jr., those convicted in the case
include: David Ghysels Jr., formerly of now-bankrupt Lehman
Brothers Holdings Inc.; Timothy O’Connell a former Merrill Lynch
& Co. broker. Besides Malin, two former day-trading executives
at New York-based Watley were also convicted in the cases:
Keevin Leonard, who was a supervisor of proprietary trading
there, and Linus Nwaigwe, a former Watley compliance director.
Each was sentenced to prison.

Andrew Frisch, a lawyer for Mahaffy and Thomas Dunn, a
lawyer for Leonard, both declined to comment. Donna Newman, a
lawyer for Nwaigwe, and Jeffrey Hoffman, a lawyer for Ghysels,
didn’t immediately respond to voice-mail messages yesterday
after business hours seeking comment on the government’s letter.

‘Front-Running’

Prosecutors argued at the trial that the brokers helped the
Watley traders engage in “front-running” by holding their
phone receivers up to their squawk boxes and transmitting the
squawks. This allowed the Watley traders to buy and sell shares
at more attractive prices than would have been available once
the squawked orders were executed.

In return, Watley traders placed “wash trades” with the
brokerages, buying and selling the same security at the same
price and paying commissions to the brokers, prosecutors said.

The defendants, who were indicted in 2005, were tried
twice. The first trial in 2007 ended with a deadlocked jury on a
conspiracy count and acquittals of multiple securities-fraud
charges for all the defendants. One defendant, Timothy
O’Connell, was convicted of witness tampering. The federal
appeals court in New York let that conviction stand.

Mahaffy and his co-defendants were convicted after a second
trial in 2009.

The defense argued at the trials that the information
broadcast wasn’t confidential. The SEC transcripts, in which
brokerage officials testified that the squawked information
wasn’t confidential, backed the defense, the appeals court said.

The case is U.S. v. Mahaffy, 1:05-cr-00613, U.S. District
Court, Eastern District of New York (Brooklyn).